How to Set and Agree Your Invoice Payment Terms

Finance Insights for Professionals

Finance Insights for ProfessionalsThe latest thought leadership for Finance pros

Friday, October 4, 2019

Getting your payment terms right can have a major impact on your business’ cash flow. Here’s how to make sure you get paid on-time as much as possible.

Article

It’s estimated that 500 billion invoices were sent around the world in 2015, and that amount has been steadily growing. However, this doesn’t necessarily mean companies are having an easy time with their cash flow. Around 60% of invoices are paid late, with companies in the US taking an average of seven extra days to pay.

There are a number of reasons for this, often to do with company culture, but one contributing factor is the payment terms on the invoices themselves. Various studies have shown that setting and agreeing the right terms can have a major impact on how early invoices get paid, so you need to make sure your company’s serve its needs as best as possible.

Set the right terms (and don’t worry if they go past due)

On average, US firms use 32-day payment terms for their invoices. However, this might not be the best option for your company. Some research suggests that shorter payment terms lead to a higher likelihood of invoices being overdue, but result in B2B clients settling up earlier overall.

Accounting firm Xero analyzed millions of its invoices and found that among the firms using its platform, those that set a 28-day due date generally got paid in 28 days. However, those that set seven-day payment terms got paid in 13 days; so six days overdue, but still more than two weeks quicker overall.

Use the right wording

You need to make sure you’re correctly communicating in your invoices, and being as clear as possible. If clients are confused about what they’re reading, it will likely lead to delays in payment. Make sure all your terms are clear and that you agreed on them beforehand. This also allows you to more easily charge late fees by getting your client to agree to this stipulation.

The words you use on the actual invoice can also have an impact. Freshbooks research found that using exact terms makes on-time payments more likely, so it’s better to avoid using phrases like ‘net 21’ or ‘on receipt’. Saying please and thank you is also important, increasing the number of invoices paid by around 5%.

Don’t forget the basics

According to Due, the terms of sale are “the essential components of any invoice”. It’s vital you get these right. They set the expectations between you and your client, and it’s surprising how many businesses make rudimentary mistakes that cause unnecessary confusion and make late payments more likely.

For example, you need to make sure your clients know exactly what they’re paying for when terms are agreed. This is crucial in international trade, when things like duties and taxes come into play. Any additional charges need to be clarified beforehand wherever possible in order to make the payment process as smooth as possible.

Comments

Join the conversation...

Back To The Top!